Herbalife neared $5 billion mark in 2018 report; waits for other shoe to drop in Goudis/China probe

25-Feb-2019 - Last updated on 22-Jul-2019 at 14:24 GMT

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Network marketing giant Herbalife reported a 10% full year net sales rise in its year-end earnings statement. The company recorded just a shade under $5 billion in yearly sales.

The good news comes as Herbalife is under investigation for comments made by former CEO Rich Goudis, which came to light earlier this month. Goudis abruptly resigned in early January because of unspecified comments.

SEC probe

According to a report in the Wall Street Journal, Goudis allegedly was caught on tape telling a former employee who worked in Hong Kong or in mainland China to ignore the company’s entertainment expense accounting policies. The US Justice Department and the Securities and Exchange Commission have been investigating Herbalife regarding its anti-corruption policies in China.

The revelation was of grave concern to stock traders, who drove the company’s share price down 5% the day after the report was published. Nevertheless, the company’s shares are still trading near the all time high of more than $59 a share achieved in January (the company’s shares split 2 for 1 several years ago).

Government probes of company, industry

This is not the company’s first experience with a high level government probe. In July 2016 the company agreed to a settlement with SEC to put to rest allegations that its business model amounted to an illegal pyramid scheme. Herbalife agreed to alter the way in which it classified and compensated its independent distributors. And, while Herbalife admitted no wrongdoing in the agreement, the company also acceded to a $200 million fine.

And in China, Herbalife is one of the companies involved in a government crackdown on the entire sector. In an earnings call with stock analysts, CEO Micheal Johnson (who stepped back into the role when Goudis was ousted) said, “[I]n China, I think one of their objectives is social stability. And I think there was a lot of negative press around the product claim that brought attention to the types of products we sell, which are functional foods and healthcare products. And so, that’s started this and with that negativity just propelled the [government] I believe to take a closer look at the industry. But again it's not Herbalife, this is the industry,” he said.

Opportunity in Mexico

Herbalife, which sells a range of functional foods and dietary supplements, recorded increased product volumes in most of its markets, including Asia Pacific, China, the Americas and Europe and Mexico. Herbalife measures volume with a metric it calls volume points, which co-president John DiSimone has called “basically an Herbalife currency.”

In particular the company said there was increased opportunity in Mexico. The volume points in that country have grown, but not nearly as fast as other markets such as China. The company has been selling less in other markets in Central and South America, however, reflecting unrest in Guatemala and Honduras, the political and economic crisis in Venezuela and the collapse of Argentina’s currency. Mexico is by comparison a relatively stable and prosperous bright spot in the region.

“We are under penetrated in a lot of markets. There’s a lot of opportunity in Mexico, a country that's really a great market for us but not materially different demographically to some of the other markets or socioeconomically in some of the other markets we're in,” co-president John Agwunobi told analysts during a presentation to brokers in New York. That call and the year end earnings call with analysts have been posted in transcript form on the site seekingalpha.com.